THE NATION’S HOUSING : Pitfalls of Mortgage Life Policies

WASHINGTON — If you’ve just financed or refinanced your home and you get a slick promotional mailing from your lender offering mortgage life insurance, be on the alert. The insurance policy could well be a far better deal for your lender than for you as a consumer.

Interviews with state insurance commissioners, home lenders, private actuaries and insurance company executives reveal mortgage life insurance to be a high-commission, high-profit sideline for growing numbers of financial institutions.

Unlike most forms of insurance, its pricing to the consumer--the homeowner--is set through what regulators call a “reverse competition” process. This means that the highest-priced insurance policies are the ones most likely to be offered to you by your lender because they come with the fattest commission schedules.

The comparison-shopping that occurs in the mortgage life insurance field is done not by the homeowners who pay the monthly premiums, but by the lending institutions who search for the best deal--for themselves. Commonly the best deal means a lump-sum commission of 30% to 40% of your first-year premium directly into your lender’s pocket. On top of that there may be bonuses or other compensation, plus 15% to 20% commissions on your annual premiums for the length of your mortgage.

Mortgage life insurance policies guarantee that in the event of your death, the full principal balance of your loan will be paid to your lender. The attraction is that your family or heirs will be relieved of the heavy financial burden of paying off the mortgage or being forced to sell the house. Premiums are usually included in your monthly mortgage payment--giving you a convenient way to buy the protection you desire. It’s a popular product: As of 1990, according to the American Council on Life Insurance, $57 billion of coverage was in force nationwide.

William H. McCartney, president of the National Assn. of Insurance Commissioners--an organization composed of state insurance regulators--says mortgage life insurance is often “overpriced” and even “abusive” to homeowners.

His group recently completed a two-year, national study of all forms of credit life insurance--including mortgage life--and found that an average 38.8% of annual premiums paid on such policies benefited consumers in the form of claims payments. In some states, such as Louisiana, less than 25% of premiums went to pay claims. In other words, 75 cents of every premium dollar went to the insurance companies, commissions to lenders and other expenses.

This contrasts with the 50% to 70% claims ratios typically experienced on standard term life insurance policies, according to an estimate from the American Council on Life Insurance.

To illustrate the wide divergence in pricing, James Hunt, a professional actuary based in Concord, N.H., compared the premiums for $100,000 worth of mortgage life insurance offered by major underwriters with term life insurance quotes readily available for individuals of the same age, sex and health status. The mortgage life insurance premiums for 37-year-old male nonsmoker homeowners ranged from $31 to $36 a month. The same individuals, according to Hunt, could buy term life insurance for $14 to $16 a month.

For homeowners in their mid-40s or above--especially in higher-cost housing markets on the East and West coasts--the price differential can be even more dramatic. For example, one Maryland couple in the 45-year-old bracket recently received an offer for mortgage life insurance on a $160,000 loan. The insurer was a large, well-known firm, Minnesota Mutual Life of St. Paul, Minn. The monthly cost to insure the husband alone came to $132.84, or $1,590.08 a year.

The same couple had also recently explored term life insurance. For a first-year premium of $1,590 the husband could qualify for $750,000 worth of coverage--4.5 times as much as under the mortgage life alternative. Although it is true the premium for the term policy would increase in subsequent years, the amount of coverage provided by the fixed-rate mortgage life insurance would decrease over the years.

Asked for comment, Minnesota Mutual Life’s director for mortgage market services, Dave Steppat, argued that the two forms of insurance are distinctly different products, and priced accordingly. A key underwriting difference, he said, was the absence of a mandatory medical exam. Yet the application for insurance sent to the Maryland couple asked for detailed medical information, and authorized the insurers to contact physicians and other sources of medical data. In fine print on the back of an accompanying marketing brochure, the insurer also reserved the right to require an “insurance medical exam or laboratory tests.”

Neither Steppat nor the Baltimore savings and loan offering its mortgage life insurance policy would disclose compensation paid the lender for each policy sold. But a mortgage banker familiar with commissions and bonuses paid by a variety of national insurers called mortgage life a “candy jar” for participating lenders.

“Think about it,” he said. “We get the 40% commission, we get ongoing commissions in future years, and we’re the beneficiaries of the insurance coverage. Where else can I get such a sweet deal?” The mortgage banker insisted on anonymity.

Asked for advice on when homeowners should sign up for mortgage life insurance proffered by their lenders, Stephen Brobeck, executive director of the Consumer Federation of America, had just two words: “Almost never.”